Question

Free Cash Flows

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

	2016		2015
Sales	$6,900.0		$6,000.0
Operating costs excluding depreciation	5,175.0		5,100.0
Depreciation and amortization	151.0		126.0
Earnings before interest and taxes	$1,574.0		$774.0
Less Interest	148.0		129.0
Pre-tax income	$1,426.0		$645.0
Taxes (40%)	570.4		258.0
Net income available to common stockholders	$855.6		$387.0
Common dividends	$770.0		$310.0

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

	2016		2015
Assets
Cash	$72.0		$60.0
Short-term investments	35.0		30.0
Accounts receivable	1,050.0		840.0
Inventories	1,518.0		1,380.0
Total current assets	$2,675.0		$2,310.0
Net plant and equipment	1,512.0		1,260.0
Total assets	$4,187.0		$3,570.0
Liabilities and Equity
Accounts payable	$414.0		$360.0
Accruals	621.0		540.0
Notes payable	138.0		120.0
Total current liabilities	$1,173.0		$1,020.0
Long-term debt	1,380.0		1,200.0
Total liabilities	$2,553.0		$2,220.0
Common stock	1,432.4		1,234.0
Retained earnings	201.6		116.0
Total common equity	$1,634.0		$1,350.0
Total liabilities and equity	$4,187.0		$3,570.0

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the ROIC for 2016? Round your answer to two decimal places.
   ________ %
   
2. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   After-tax interest payment	$   ________ million
   Reduction (increase) in debt	$   ________ million
   Payment of dividends	$   ________ million
   Repurchase (Issue) stock	$   ________ million
   Purchase (Sale) of short-term investments	$   ________ million

Answer 1

a) ROIC stands for Return on Invested Capital is computed by using the below formula:

= ( Net Operating Profit After Tax / Invested Capital )

Net Operating Profit After Tax = Earning before Interest and Tax - Tax of 40%

= $ 1,574 - 40%

= $ 944.4

Invested capital = Common stock + Retained Earnings + Long-term debt

= $ 1,432.4 + $ 201.6 + $ 1,380

= $ 3,014

So by plugging these values in the above mentioned formula we shall get ROIC as below:

= $ 944.4 / $ 3,014

= 0.3133 or 31.33% Approximately

b.

S.No.	Particulars	Workings	Answer
1	After-tax interest payment	= 148 ( 1 - 0.40) = $ 88.8	$ 88.8 million
2	Reduction (increase) in debt	= $ 1,380 - $ 1,200 = $ 180	$ (180) million This is an increase in debt hence put in negative sign
3	Payment of dividends	$ 770 as can be seen from the income statement	$ 770 million
4	Repurchase (Issue) stock	= $ 1,432.4 - $ 1,234 = $ 198.4	$ (198.4) million This is an issue hence in negative sign.
5	Purchase (Sale) of short-term investments	=$ 35 - $ 30 = $ 5	$ 5 of purchase of investment

After tax interest payment for 2015 are $ 129 ( 1 - 0.4)

= $ 77.4 million

Dividend payment for 2015 is $ 310 million

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